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Taking a View: Corporate Speculation, Governance, and Compensation

Authors

  • CHRISTOPHER C. GÉCZY,

  • BERNADETTE A. MINTON,

  • CATHERINE M. SCHRAND

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    • Christopher C. Géczy is at University of Pennsylvania. Bernadette A. Minton is at The Ohio State University. Catherine M. Schrand is at University of Pennsylvania. The authors thank Gordon Bodnar, Richard Marston, and Regina Risnychok and the Weiss Center for International Financial Research at the Wharton School for extensive administrative support and access to the survey data; Rudi Fahlenbrach, Andrew Metrick, and Geoff Tate for other data used in the paper; and Sam Byun, Myriam Chang, Wes Gray, Ari Hadida, Lisa Huong, Jiunjen Lim, Vicki Von Krause, Jarad Rosenberg, and Michelle Zhang for excellent research assistance. We thank an anonymous referee, Bill Ahearn, Ramji Balakrishnan, Robin Greenwood, Rob Stambaugh (the editor), and participants at the Western Finance Association meetings, Federal Reserve Bank of New York, University of North Carolina, University of Virginia (Darden), and University of Iowa for helpful comments and the Charles A. Dice Center for Research in Financial Economics and the Rodney L. White Center for Financial Research for financial support. We gratefully acknowledge the Caesarea Center award.

ABSTRACT

Using responses to a well-known confidential survey, we study corporations' use of derivatives to “take a view” on interest rate and currency movements. Characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively; that is, they do not speculate to increase risk by “betting the ranch.” Speculating firms encourage managers to speculate through incentive-aligning compensation arrangements and bonding contracts, and they use derivatives-specific internal controls to manage potential abuse. Finally, we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey; they are not.

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